tag:blogger.com,1999:blog-5908830827135060852.post7517174442478225650..comments2021-01-24T11:37:56.108-05:00Comments on Bond Economics: The Budget Constraint Does Not Mean The Government Will Pay Off Its DebtBrian Romanchukhttp://www.blogger.com/profile/02699198289421951151noreply@blogger.comBlogger21125tag:blogger.com,1999:blog-5908830827135060852.post-32543054792377377062015-07-13T11:58:06.864-04:002015-07-13T11:58:06.864-04:00https://originofspecious.wordpress.com/2015/06/14/...https://originofspecious.wordpress.com/2015/06/14/the-government-debt-is-not-a-burden-on-future-taxpayers-slightly-wonkish-2/<br />This article seems on topic.<br />The point being if the govt interest payments are spent, it generates tax revenues. If not then it is 'borrowed' back. If for some reason people don't want bonds the govt can 'print money.' That's just a QE/asset swap. The thing is they like interest payments so they don't.<br />Bonds are not a claim on tax revenues, any more than cash or reserves. Cash is a zero interest bearer bond issued by the Central Bank. Reserves are variable rate bonds issued by the Central Bank.<br />They are all money, it's just the amount of "welfare" paid with them that's the difference.<br />There is little difference between a bond and a child from an MMT point of view, the child receives child benefit, if I die and gypsies look after the child, they get the benefit. The only difference is issuing criteria, etc :)Randomhttps://www.blogger.com/profile/04445772572707818311noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-69701500862262696182015-04-17T09:36:45.938-04:002015-04-17T09:36:45.938-04:00Since I am a fairly strong believer in the "r...Since I am a fairly strong believer in the "rate expectations determine bond yields" view, I cannot complain about the DSGE models on that front.<br /><br />For an _economic_ model, it seems fair to assume that bond yields are priced in a consistent fashion with the rest of the model (some version of efficient markets). The only exception is if you want to study the effect of bond market inefficiency. But if you are an interest rates analyst looking to build models to make money, if you want to remain employed, you cannot just assume that the bond markets are always perfectly efficient. However, based on my experience, bond markets are hard to beat based solely upon trades predicated upon the direction of the rate of interest; most practitioner effort is spent looking for nooks where you can make money based on exploiting badly priced risk premia (credit, options structures, rates relative value). This behaviour is consistent with bond yields normally remaining near "fair value".<br /><br />The problem with the New Keynesian models is that they have a circular dependence upon the natural rate of interest. (The RBC models are just silly.) Central banks have a lot more freedom of action than those models imply. I hope to write some articles about this "circular dependence" problem, but the summary is that that "natural interest rates" are being constructed in such a fashion that the whole methodology cannot be falsified. Which means that the idea has no theoretical or predictive content.<br />Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-10106385850597233172015-04-16T23:58:33.611-04:002015-04-16T23:58:33.611-04:00It just shows how question begging these models ar...It just shows how question begging these models are. If one assumes a perfect market, of course assets are going to be priced correctly.A Hhttps://www.blogger.com/profile/06916657901677009228noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-68687293642569809812015-04-16T22:35:54.638-04:002015-04-16T22:35:54.638-04:00I was thinking mainly about nominal rate determina...I was thinking mainly about nominal rate determination. They are equal to the expected path of short norminal rates, which is an arbitrage relationship.<br /><br />The Real Business Cycle (RBC) models have a flexible price level, and the price level adjusts so that the short-term real rate is always equal to the real discount rate in the utility function. Since there is no choice in the matter, I do not see this as a supply constraint issue. This description of the real world is trivially wrong, however.<br /><br />The New Keynesian models have price stickiness. This allows real rates to depart for awhile from the "natural rate", but there is a strong presumption that the short-term real rate will return to the natural rate, so presumably long-term real yields would not be volatile. But since this is reversion to a "natural" level, I do not know whether this is a supply constraint issue.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-50196083087087570742015-04-16T18:29:44.736-04:002015-04-16T18:29:44.736-04:00What do you mean by arbitrage?
Looking at Cochran...What do you mean by arbitrage?<br /><br />Looking at Cochrane's model in his fiscal theory of the price level paper, the real interest rate comes from the household utility function given they receive a fixed endowment ever period. Isn't this a supply constraint and essential to the discount rate used to price bonds?<br /><br />http://media.hoover.org/sites/default/files/documents/2014CochraneMonetaryPolicywithInterestonReserves.pdfA Hhttps://www.blogger.com/profile/06916657901677009228noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-24628073547778029932015-04-16T17:05:11.985-04:002015-04-16T17:05:11.985-04:00Hello,
When someone says they "paid off thei...Hello,<br /><br />When someone says they "paid off their mortgage", the usual interpretation is that they no longer have a mortgage, not that they replaced it with an even larger mortgage. Therefore, the naive interpretation of DeLong's statement is that the government debt would be driven to zero. This is not equivalent to the constraint, as I show. I assume that DeLong does not believe that, but why use that wording? It may have been a bad idea to drag his statement into this, but I was in the process of writing the chapter, and he used the phrasing that I take objections to. It gave me a topical intro section.<br /><br />I object to the decomposition into primary surplus plus interest expense, but if you do it, you do end up with the relationship holding if the interest rate is greater than the growth rate of the economy. In a later section, I explain problems with the interest rate assumption. It includes the some of the comments in the article I reference.<br /><br />The steady state assumption is just for the ease of presenting simulation results. I have reworded things, and I will try to downgrade the emphasis on "steady state". I am writing this report by almost completely avoiding equations. This is partially because ebooks have a hard time with equations (they have to be converted into image files), and partially as I am trying to aim this at a wider audience. (I might not succeed, but it is worth a shot.) I could add in the equations for a a steady state GDP ratio, but I was unsure whether they add much. I would probably just do a graph of the relationship with some parameters fixed.<br /><br />But as a final note, this section is the second half of a chapter that starts out with Functional Finance. My argument is this classical budget constraint is either trivial or wrong, and that Functional Finance arguments represent the true constraint on government finance. (Before anyone objects, I lump any notion of an external constraint in with Functional Finance principles.) This excerpt possibly is not the best picture of my views, but I ran it as it seemed topical and I want to keep the material for my blog flowing at a steady pace.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-79245347356147339572015-04-16T15:36:14.304-04:002015-04-16T15:36:14.304-04:00I should add that this:
"All the governmenta...I should add that this:<br /><br />"All the governmental budget constraint says is that for every dollar in debt, the government will need to run a future primary surplus which has a discounted value (present value) of $1"<br /><br />is equivalent to the DeLong claim you begin by criticizing. If the market value of outstanding government debt is equal to expected future primary surpluses, then a decline in expected future surpluses must lead to a decline in the market value of debt, implying a rise in interest rates and/or higher inflation. If you don't want to end up where DeLong is, you will need to find a different way of thinking about this.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-635308849369096032015-04-16T15:30:21.595-04:002015-04-16T15:30:21.595-04:00We cannot assume that interest rates are set by pr...We cannot assume that interest rates are set by private markets when we are discussing government budgets, and simultaneously assume that interest rates are set by the central bank when we are discussing monetary policy.<br /><br />I don't agree that the debt dynamics are trivial; in fact, they are the only interesting thing here.<br /><br /> If we write the debt-gdp ratio as d, the primary balance as b, the nominal interest rate on government debt as i, the (real) growth rate as g, and the inflation rate as p, then we have:<br /><br />d_t+1 = d_t (1+i)/(1 + p + g) - b_t<br /><br />For small values of i, p and g this is equivalent to:<br /><br />Delta-d = (i - p - g)d - b<br /><br />If you want a constant debt-GDP ratio, you need to choose the policy variables i and b so that Delta-d = 0 for the prevailing p and and g. If you want a rising or a falling path, pick different variables. Phrases like "present value of future primary surpluses" do not have any positive content.<br /><br />I do not think the notion of a steady state growth path has any value for explaining the behavior of real economies. And certainly the claim that the current market value of government debt is equal to the present value of expected future surpluses is laughably wrong as a description of any actual debt market.<br /><br />I know that playing with these kinds of models can be fun but I'm afraid you will be wasting your considerable talents if you go further down this road.<br /> JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-85899216274023620252015-04-16T07:36:26.172-04:002015-04-16T07:36:26.172-04:00I am not sure I follow you on the supply or demand...I am not sure I follow you on the supply or demand constrained point. The long-term discount rate in a DSGE model is the expected path of short-term rates, as this is determined by arbitrage. Until you add a term premium model, that seems to be the best you can do.<br /><br />The determination of the short term rate within a DSGE model to me looks like a portfolio mix decision, and it does not seem to me to be just loanable funds. Since everything is determined simultaneously, the supply and demand of funds are not fixed, which is how I would interpret loanable funds. (People may choose to interpret the equations as being the same as loanable funds, but that is just a verbal projection, which does not appear to capture what the equations are saying.)<br /><br />A SFC model does not attempt to characterize expectations out to infinity, but it seems it should at least try to capture expectations for the determination of bond yields.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-63463846676162284272015-04-16T01:04:20.010-04:002015-04-16T01:04:20.010-04:00Very interesting post, I look forward to reading y...Very interesting post, I look forward to reading your book. I made a few attempts to put DSGE into an SFC but I didn't get to far.<br /><br />It seems like another fundamental flaw is that the economy has to be supply constrained and have loanable funds model deciding the interest rate. This is the only way for the interest rate to be fixed at a level which fulfills the budget constraint (inter temporal maximization right). <br /><br />If the economy is demand driven (not supply constrained) then their is no reason to believe that the interest rate used to discount current government debt will be the same one to discount future surpluses. <br /><br />is this more or less right?A Hhttps://www.blogger.com/profile/06916657901677009228noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-15834255229830810512015-04-13T06:44:10.266-04:002015-04-13T06:44:10.266-04:00I have the "steady state" assumption the...I have the "steady state" assumption there solely to be able to calculate the sum of the discounted primary surpluses. Without that assumption, it is very hard to characterize the trajectory. The constraint equation will still hold in a more general case (under the rate and growth assumption), but the results would be harder to understand and replicate. I am trying to explain how the constraint works, by showing how different trajectories behave, and I am not saying that the real world is in a steady state.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-69737480054662924822015-04-12T22:15:01.248-04:002015-04-12T22:15:01.248-04:00I don't have your confidence that the variable...I don't have your confidence that the variables grow at the same rate. To back up this unease, I put together a post <a href="http://mechanicalmoney.blogspot.com/2015/04/macroeconomic-stimulus-leaves-remainder.html" rel="nofollow"> "Macroeconomic Stimulus Leaves a Remainder" that can be found at http://mechanicalmoney.blogspot.com/2015/04/macroeconomic-stimulus-leaves-remainder.html </a> <br /><br />The chart showing a calculation for the stimulus received by the United States economy over the last 67 years shows large swings. This makes me believe that the variables such as velocity must also have wide swings. If any parameter was steady, I would be suspicious that the steadiness is an artifact of central bank management.<br /><br />No matter what, thanks for your post. I always appreciate the effort you put into your blog.Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-77661114928570910952015-04-12T13:40:51.350-04:002015-04-12T13:40:51.350-04:00Within the context of how the Canadian monetary sy...Within the context of how the Canadian monetary system currently operates, there is a need to issue bonds. (Why Canada? I am using the Canadian model as a baseline example in my articles. Other countries can then be examined as modifications of the Canadian system.) Operating procedures could be changed, but there would be costs associated with such a shift. I will eventually write a longer article about this; I have written some comments elsewhere.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-44936958108231837712015-04-12T13:09:37.231-04:002015-04-12T13:09:37.231-04:00I think a very simple solution is - don't issu...I think a very simple solution is - don't issue debt! There is no need to issue bonds.Randomhttps://www.blogger.com/profile/04445772572707818311noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-48695306140390467922015-04-08T18:24:46.031-04:002015-04-08T18:24:46.031-04:00Yes, you have separate nominal and real growth rat...Yes, you have separate nominal and real growth rates, and inflation is the residual between the two.<br /><br />But in a steady state, all nominal stock and flow variables will grow at the same rate as GDP. This means that money growth is equal to GDP growth, and velocity is constant.<br /><br />You can grow nominal GDP and keep money constant. But this means that the ratio of money holdings to household income falls. This behaviour is generally not seen. In my report, I have a chart of Canadian "currency" (dollar bills) as a % of GDP, and it is fairly steady over the decades.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-23790473950017651292015-04-08T18:08:06.927-04:002015-04-08T18:08:06.927-04:00This is a conventional answer -- perhaps that is w...This is a conventional answer -- perhaps that is why it bothers me. <br /><br />I consider that an economy can grow in three ways: <br /><br />(1)The velocity of money can increase which really means that goods are exchanged more quickly. <br /><br />(2) The money supply can increase in a steady fashion, taking all prices with it in an inflationary manner. An inflationary economy may be 'steady' in the sense that the amount of real goods and serves are constant -- only the prices change. <br /><br />(3), the amount of goods and services can increase in quantity, absorbing an increase in money supply without inflation. <br /><br />From this 'three option perspective', an economy modeled to have a "relatively steady real growth rate." would need to have THREE variables to allow tracking of each option, and would have preassigned growth attributes to each of the three variables. I dislike the idea of preassigned results.<br /><br />That said, I think the world economy has seen all three options of growth over the years of world trade expansion. We all, as participants in a world economy, simply make more trips to the store, pay increased prices for most everything, and take more variety home, than we did 50 years ago.<br /><br />An interesting economic world!Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-60684511119393061502015-04-08T17:03:43.949-04:002015-04-08T17:03:43.949-04:00I am using "steady state" as it used in ...I am using "steady state" as it used in the SFC model literature. The economy and all of its components all have the same growth rate, so the ratios of variables remains constant. A no-growth economy is just a special case. This may not match the way people would think about a physical system, but the tendency is for economies to have relatively steady real growth rates.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-33569617816402854682015-04-08T15:34:31.784-04:002015-04-08T15:34:31.784-04:00"For simplicity, I will assume that the econo...<i> "For simplicity, I will assume that the economy is in a steady state, in which nominal interest rates and nominal GDP growth rates are constant." </i><br /><br />That is a <i> steady 'growth' state </i> to my way of thinking. A 'steady state' would be a no-growth condition where one year's GDP equaled the next year's GDP.<br /><br />Another topic, to my way of thinking, interest rates are like rent. They are just a cost of doing business. They have nothing to do with the money supply.Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-25211587001641979682015-04-08T09:56:29.412-04:002015-04-08T09:56:29.412-04:00Yes, the cases where the discount rate is greater ...Yes, the cases where the discount rate is greater than the growth rate is covered in the next section of the report (which I have not yet written). People might need to buy the eReport to get those juicy details...Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-56921131125698450072015-04-08T09:31:47.101-04:002015-04-08T09:31:47.101-04:00"For non-growth models, first high growth rat..."For non-growth models, first high growth rates, the public sector can even a primary deficit in the long run and the public debt converging to a constant value."<br /><br />should be "for growth models ..."Ramananhttp://www.concertedaction.comnoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-31059009698720431032015-04-08T09:30:36.566-04:002015-04-08T09:30:36.566-04:00Brian,
The identity:
(Market Value of Governmen...Brian,<br /><br />The identity: <br /><br />(Market Value of Government Debt) = (Discounted sum of all future primary fiscal balances).<br /><br />is not true always. <br /><br />For example consider a non-growth model in which the output reaches a constant value. The identity is true for r ≠ 0 but doesn't work for r = 0.<br /><br />For non-growth models, first high growth rates, the public sector can even a primary deficit in the long run and the public debt converging to a constant value. <br /><br />The series summation for the primary surpluses is actually negative, while the public debt at present is not. <br /><br />So the identity <br /><br />(Market Value of Government Debt) = (Discounted sum of all future primary fiscal balances).<br /><br />needn't hold. Ramananhttp://www.concertedaction.comnoreply@blogger.com